“Tax the Rich” Sounds Like a Great Idea Until This Happens

Keith Fitz-Gerald Sep 02, 2016
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European commissioners ruled Tuesday that Apple must repay billions in back taxes shunted through an unstaffed Irish subsidiary. Google, Amazon, Starbucks, eBay, Microsoft, Yahoo, and McDonalds are next on the chopping block.

Good luck with that.

They’ve started a pissing match they cannot win.

Worse, in their rush to “tax those evil rich corporations,” revenue-hungry commissioners have just damned any hope Europe ever had of a recovery.

Worse still, you’re going to pay for it unless you understand how to play the situation profitably.

Here’s what you need to know.

Let’s start with the ruling itself.

European commissioners in Brussels have decided that a special deal between Apple and Ireland’s tax authorities favors Apple and, because it is unavailable to other companies in similar situations, null.

According to those same commissioners, the deal allowed Apple to get away with paying next to nothing on more than $180 billion in income, virtually all of which was shunted through the Emerald Isle to its offshore fund. Initial calculations place the tab at around $14.5-$21 billion, plus interest over the past decade.

Naturally, that set traders on edge over fears that this would tank the company’s stock.

Hardly.

Apple’s market cap is $575 billion at the moment. The company has produced $220.4 billion in revenue the first six months of this year alone. It sold $24 billion in iPhones alone during the second quarter.

Financially speaking, the penalty is little more than a slap on the wrist, even though it makes for great headlines. Taxing “evil rich corporations” always does.

But, here’s the thing.

This ruling is a retroactive penalty that not only breaches Ireland’s sovereignty but also opens the door to a complete rewrite of international tax law.

That’s hard to understand if you’re not in the world of high finance, so let me put what’s happening in context.

What the E.U. commissioners are attempting to do with this ruling would be like Her Majesty’s Revenue & Customs Department trying to assess back-taxes on everyone and every corporation that has profited in America since it became an independent nation. It’s a blatant cash grab that violates national sovereignty based on laws that “should have been” instead of what they are.

CEO Tim Cook has called the probe “political crap” and I agree – only I’d be tempted to use far stronger language in the process were I in his shoes.

What you need to understand is that this is yet another example of legislative overreach by bureaucrats who do not understand how real money works, nor the consequences of their actions.

Let’s start with Apple itself.

The company employs 22,000 workers in Europe with another 257,000 working in other countries. A further 1.4 million people rely on Apple for income when you include developers and retailers at more than 700 Apple Resellers and official Apple stores.

Punitively level taxes, and guess where employment goes?

Right out the door… to nations that actually have a positive view of success, business development, and financial transparency. Like, oh, I don’t know… Singapore, Malaysia, Taiwan, or even China. I’ll bet Apple takes on a decidedly Nordic flavor before this is done.

This ruling will not only crater current employment, but also eliminate tens of thousands of future jobs if it sticks. That’s because Apple will pull hundreds of millions of dollars in capital investment from the E.U.

So will every other company caught in the crosshairs.

Nobody’s talking about that right now – but they will be when Apple and dozens of other targeted companies starting freezing hiring, closing facilities, and stopping professional development programs intended to create high value jobs that Europe desperately needs.

I feel terribly for millions of European students who are going to see their careers vanish before they’ve even had a chance to start them.

Now for the “fun” part.

You and I are going to pay for this madness.

U.S. Taxpayers Will Foot the Bill for the E.U.’s Cash Grab

That’s because U.S. companies doing business in foreign countries also pay taxes here and those are offset dollar for dollar by foreign taxes paid. In other words, Apple is potentially entitled to a U.S. tax credit for all foreign taxes paid.

So let’s imagine for a moment that the E.U. move is successful, and that Apple has to pay the estimated $21 billion in taxes to Ireland that it allegedly owes. That will be offset – meaning that Apple’s U.S. tax bill will be reduced by – you guessed it – $21 billion.

And guess who has to make that up when the government falls short?

You and me.

Uncle Sam has two choices to make up the difference: a) raise taxes or b) borrow more money. Either way, we pay and the politicians who got us into this mess escape responsibility for having done so yet again.

All is not lost though, at least not for investors anyway.

Here’s why.

First, this case has been building for several years and will probably take several more years to litigate. Apple will likely build up huge reserves in the meantime, on top of the resources it’s already accumulated for precisely this purpose, so by the time a payment is ultimately negotiated, it will be a non-event, affecting neither earnings nor the balance sheet.

Second, Apple is not a party to the E.U.’s tax treaties. The core of the case here is that the E.U. is telling Ireland to get Apple to pay. Ireland can tell the E.U. to go pound sand… or watch for an “Irexit” on the grounds that everybody is sick and tired of the E.U. telling sovereign nations what they can and can’t do to attract jobs.

Third, money always flows to where it is treated best. That means an entirely new stream of profits for Apple and every other company put through the ringer above and beyond any wind-down related to hostile, punitive taxation.

Tactically, what you want to do is think about the upside.

I know that this is counter-intuitive but stick with me for a moment.

No doubt there will be some short term downside from investors and traders who panic. That’s actually your entry.

The simplest way to make this trade is to set a Lowball Order out there for any company you want to buy. Apple, for example, may make sense at $90 a share.

More aggressive investors could use sell put options and accomplish the same thing with the added benefit of being paid to “go shopping.”

Either way, you’ve got a great opportunity that, once again, is made possible by feckless politicians who cannot grasp the Law of Unintended Consequences like we can grasp the Laws of Money.

Your money.

Until next time,

Keith

12 Responses to “Tax the Rich” Sounds Like a Great Idea Until This Happens

  1. Prosc says:

    I have to totally agree with your comments on the eu and like I said before I agreed with brexit even though it caused short term downside. Now there does not seem to be such a bad thing with England leaving the eu. I think that the leaders of the eu are a bunch of idiots and the European Union will eventually be dissolved. The way the world should work is like minded countries developing trade negotiations and respect the deals they make with each other. This has worked in the past and will continue to work into the future.

    • Keith says:

      Thanks for chiming in Prosc. The Apple situation makes me believe an “Irexit” is next because it lays bare the hypocrisy of EU Commissioners for all to see.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Tony says:

    Keith, spot on……the Eurocrats sit in their Ivory towers with nothing else to do but think how they can punish the general populace, for me this is just another nail in the coffin of the EEC as it is. As a Brit I’ve seen this farce on a daily basis over the last 20 odd years when the Bureaucrats really have been let out of the asylum. As for Uncle Sam paying a $21bn tax credit to Apple ….. I’d like to be a fly on the wall of the relevant government department when that subject comes up!!

    • Keith says:

      Good morning Tony and thanks for sharing.

      No doubt the IRS has some serious thinking to do…now if only the politicians would join them!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Fabian says:

    I totally agree with you. I don’t trust the EU authorities (nor ours for that matter) to make a correct and in depth SWOT analysis but in any case if the current tax system is not satisfactory, they should work on it from now on. This manic impulse the government has to change the rules way after things are settled must stop.

  4. ian says:

    I voted to leave the EU,now down to business,dont blame the EU blame our stupid leaders,we should have been given choices on every treaty,but our stupid leaders thought we run the country we will decide what to do,what happened to democracy.Maybe,just maybe they will decide that we own our country and not them

  5. Ken says:

    The EU was a good idea in a way, in that it should decrease the impetus for war, but it has been ruined by the socialist state. No society can survive that kind of abuse, because it creates too many parasites, who are fed and nurtured by the state like so many pet dogs, who demonstrate their subservience to the state by special rituals at large gatherings and their willing, and even enthusiastic participation, in needless warfare conducted by the state, which may benefit no one, and which only makes everyone poorer.
    It has become increasingly obvious that governments couldn’t care less about us out here. They screw us up one side and down the other and still expect us to be patriotic. This is pure, unadulterated bovine defecation. We are increasingly becoming a nation of serfs, as Hayek predicted. More of us need to wake up and call for a serious overhaul of our economy so that we can return to democracy. People need to become more responsible for their own lives rather than increasing their dependence upon the rest of us. This country is becoming more and more like Europe, a socialist “paradise” in which no one is responsible for their mistakes, no matter how stupid they are. A rule of history is that governments become increasingly corrupt with time, and they must then collapse to create a more just society in the ruins of the old. We are making essentially the same mistakes as Rome, and probably Ancient Egypt, made, and we know where they wound up. Our standards of education are declining, and I see that most people I talk to now are less interested in facts, as they steadfastly cling to their beliefs. This is dangerous.
    Taxes are theft. This is from one who has been mercilessly harassed by government for decades, even though there has never been any finding of mistakes or evasion, but who has been cheated out of thousands of dollars over the years. We should not have professional politicians. National service should be a contribution we make temporarily out of pride in our nation, not a lifetime job for lawyers who make millions on the side. It was intended that the country should be governed by people, who represent a cross-section of the populace, and who take time off from their regular jobs to help the country thrive.

    • Eve says:

      Great idea. But never going to happen. Lawyers have settled their cozy butts into these little loop holes and will not be giving them up!

  6. Robin Seal says:

    Well I disagree
    Apple currently does not pay US tax on unremitted profits, hence the large non US holdings of these companies.
    Those companies have for years been trying to get a US TAX AMNESTY FOR REMITTANCES OF PAST PROFITS.
    THERE WAS ONE DONE YEARS AGO.
    So
    I suggest foreign tax is a good thing as it will enable those Companies to remit foreign funds to the US, RAISE THEIR DIVIDENDS AND MAYBE SLOW DOWN THE BOARDS OF THESE COMPANIES making the types of investment purchases, many of which in the last few years, have been appalling and led to huge write offs.

  7. David Reid says:

    I agree the EU is badly managed, it is not a level playing field : the Company tax rate in Ireland is lower than in other EU states. This creates the situation where Ireland encourages Companies to register even though they may have no real business activity. A consequence is that countries such as the UK are not collecting taxes which should be paid to them. I voted for Brexit because the EU is not a democracy is inefficient and heading for disaster.

    I like living in Britain,

    David Reid

  8. David says:

    I still believe that Apple is a Tax dodger just in the same way Starbucks invented a loan from Holland to prevent paying tax in the UK. Apple is sitting on what is possibly Billions of Dollars in Bermuda or the Bahamas and is therefore dodging a US Tax Bill. This is caused by the grotesque amount of tax the US Authorities will take if they ever bring back to the US. Apple are more like a mafia organisation than a responsible citizen or company.

  9. Pierre Galea Musu says:

    I totally agree with your analysis. I have two views here. In my view I have to start from the point that it is conceptually and realistically totally wrong for the large corporations not to pay any taxes. There is no such thing as a good tax, but equally no tax at all deprives a State from its oxygen. On the other hand I am fully against the EU’s intervention against Member States’ sovereignty. One size fits all and taxing entities to kingdom come simply do not work.

    There is first hand evidence of this within the EU itself. Look at those Member States which are adopting high taxation policies to correct their economies. Taxpayers and entities have either rushed out of their respective jurisdictions or have been driven into the ground in droves leaving a vacumm behind them, with unemployment levels which are reminiscent of post war era. When taxation and associated legislation becomes heavy aggression – people simply move.

    Now that same movement, under normal circumstances, in search of a better business conditions and taxation was erstwhile guaranteed by the Four Freedoms, where one has the sacrosant right to move freely and establish oneself with the Union. What we are seeing today is an override of these Fundumentals.

    You are right in referring to a complete re-write of International Tax Law. The aggressive path that the EU is following is an attept to push common Tax Policy down Members’ throats and it will inevitably lead to one situation only: disaster. In my opinion we are already seeing its beginning. I take the liberty here to quote Sir Winston whom I believe some odd 60 years ago was prophetic of the situation where the EU wants to go now:

    1 “Some see private enterprise as a predatory target to be shot at, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.”

    2 “If you have ten thousand regulations, you destroy all respect for the law.”

    3 “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle, and last but not least.”

    4 “Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy.”

    I find much congruence in these statements with where the EU stands today. As to where it’s going…..I have a clear picture of that too!

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